“By trying often the monkey learns to jump from the tree.”
At this point, understanding what’s driving assets priced in Burning Bucks isn’t that difficult. The US Dollar was down -0.7% yesterday, leading the SP500 up +2.3%. Oil up, Gold up, Financials up. Monkeys jumping all over one another as they figured out they were all short the 50-day Monkey Moving Average.
Inverse correlations like this won’t last forever, but it will definitely last into this month-end. High R-Squares in Global Macro are never perpetual. But, for now, all of the monkeys are really learning how to jump from the trees.
I use the 50 and 200-day moving averages as behavioral tools. Other people use them as a driver of their risk management process. I wonder if they have done the math on how crowded that is. Using a one-factor model (a simple moving average) is something that I expect my son Jack to be able to do once I show him where to hit the button on Yahoo Finance.
I realize that we’re all just a bunch of monkeys trying to prove that we deserve compensation to opine on markets, but let’s get real here and at least try to evolve. Monkeys yelling “yo, bro – that chart is breaking down dude” is embarrassing. The Chinese watch CNBC’s Fast Money. I can’t imagine what they must be thinking.
Actually, I can. The Chinese are a net seller of everything US Dollar exposure and a buyer of other currencies, gold, etc. China and Japan are diversifying away from what we have been YouTubed as – a conflicted and compromised financial system. America is no longer trusted as the world’s financial fiduciary.
I received a lot of emails yesterday about why the US Dollar was going down. For the better part of this week, Howard Penney and I have been issuing thoughts on what could make the Bombed Out Buck go up, so I think these questions are both well-timed and well-placed. As we have learned this week, what the US Dollar does is the lead indicator for the Fed’s next move.
Why was the US Dollar Down yesterday?
1. Timmy Geithner speaking – that’s the Credibility Cross that the American Financial System still has to bear. I’ll let you watch the YouTube yourself.
2. President Obama speaking – right after the non-Great Depressionista GDP report of +3.5% was released, he came out and talked down the number.
There is no credibility in a currency that is backed by conflict of interest. Whether it’s Geithner telling you that US banks are “not too big to fail” or Obama telling you that you better get cozy with an “emergency” rate of ZERO percent on your hard earned savings accounts, it’s all the same thing. It’s just wrong. Americans don’t buy it, and neither do our Chinese Creditors.
Newsflash for CNBC: markets don’t trade on lagging GDP reports. They trade on future expectations.
With the US Dollar breaking down through my immediate term TRADE line of $76.20 yesterday, you saw the power associated with a multi-factor macro model. You can say that it doesn’t work, and you can say that Obama and Geithner are right too - but, if you say that, Mr. Macro Market is voting on the other side of you. Market prices don’t lie; people do.
The Buck is Burning again this morning (down to $75.88) because the 2 aforementioned political statements reminded those who are looking forward to next week’s FOMC decision that there is an explicit message from Bernanke’s boss to not signal a rate hike.
Message from Obama: Get back to your Depressionista history books Benny and start getting beared up again – there is no time for you to be doing math right now. It’s all about revisionist history and keeping rates at ZERO for an “exceptional” period of time. With Healthcare and Afghanistan, I don’t have time to deal with the house of cards that Robert Rubin built. Not now.
Unfortunately, President Obama, markets wait for no one – not even you. Norway raised rates this week and India and China are signaling sobriety now too. As the world moves toward the Australian interpretation of non-Great Depression math, they’ll be moving away from the compromised rates of return you are signing off on.
My immediate term TRADE lines of support and resistance for the SP500 are now 1042 and 1075, respectively. If Bernanke panders again next week, Burning the Buck further from here, and 1066 in the SP500 holds, we could see a final 2009 crescendo of clanging Macro Monkeys like me take the SP500 to higher-highs at 1109. People hate this rally, and they probably hate the idea of that happening too.
The alternative, President Obama, is to have Bernanke signal what he should have a month ago. Yes, you’ll have to take your medicine and see the stock market drop like it did in 4 out of the last 5 days. But medicine is what this sick monkey called the US Financial System desperately needs. A reflated stock market hasn’t helped your approval ratings anyway, so you may as well get on with it.
Have a solid weekend with your families. Best of luck out there today,
EWZ – iShares Brazil — President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.
EWT – iShares Taiwan — With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there. With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.
XLU – SPDR Utilities — We bought low beta Utilities on discount (down 1%) on 10/20. Bearish TRADE, Bullish TREND.
FXC – CurrencyShares Canadian Dollar — We bought the Canadian Dollar on a big pullback on 10/20 and again on 10/28. The TREND and TAIL lines for the Canadian Dollar remain bullish.
EWG – iShares Germany — Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.
GLD – SPDR Gold — We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.
XLV – SPDR Healthcare — We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.
CYB – WisdomTree Dreyfus Chinese Yuan — The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.
TIP – iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
EWJ – iShares Japan — While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.
UUP – PowerShares US Dollar — We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.
FXB – CurrencyShares British Pound Sterling — The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.
SHY – iShares 1-3 Year Treasury Bonds — If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.